‘Disastrous financial collapse’: Ray Dalio on problem bigger than raising debt ceiling
Raising the U.S. $31.4 trillion debt limit without fixing the issue at large is a “kick-the-can-down-the-road” type solution that will eventually lead to a “disastrous financial collapse,” billionaire and Bridgewater’s founder Ray Dalio warned in a LinkedIn post.
With the so-called X-date (June 1) just over a week away, the most likely outcome in this debt ceiling debate will be either avoiding default or raising the debt cap soon after the U.S. fails to pay its bills, said Dalio.
But that is not the most critical outcome since increasing the debt limit without dealing with the issue more substantively would lead to a disaster.
“Increasing the debt limit the way Congress and presidents have repeatedly done, and most likely will do this time around, will mean there will be no meaningful limit on the debt. This will eventually lead to a disastrous financial collapse,” Dalio wrote.
Spending more than the country earns is not sustainable. With debt increasing faster than income, it will be impossible to pay a high enough rate to convince creditors to hold the debt while at the same time having an interest rate not too high for borrowers to service their debts, according to Dalio.
“When debt assets and liabilities reach the point that the amount of debt sold is greater than the amount of debt that buyers want to buy, central banks are faced with a choice: they either have to let interest rates rise to balance the supply and demand, which is crushing to debtors and the economy, or they have to print money and buy the debt, which is inflationary and encourages holders of the debt to sell the debt, which makes this debt imbalance worse,” he said.
This will eventually create a debt crisis that will see a run on the central bank with government bonds getting sold.